Nov. 8 (Bloomberg) -- Jon Feltheimer and Michael Burns
crank up the volume as an image flickers to life on a flat-screen TV in their offices at Lions Gate Entertainment Corp. in
Santa Monica, California.

For years, Lions Gate’s two bosses have searched for a
breakout franchise of movies to allow the independent studio to
thrive in an industry dominated by behemoths such as Walt Disney
Co. and Time Warner Inc.

On this August afternoon, the two men watch a 60-second
trailer for what they say is their best hope -- “The Hunger
Games.” It’s set in a dystopian future where a totalitarian
state forces 24 teens to duel to the death on national
television.

On screen, a 16-year-old girl runs through a dark forest as
fireballs explode in the trees around her. She fires an arrow
and it morphs into a fiery logo for the $80 million movie --
Lions Gate’s biggest production ever -- scheduled for a March 23
release, Bloomberg Markets magazine reports in its December
issue.

In an era when blockbusters released by the six major
studios have little impact on the share price of their parent
corporations, Lions Gate offers investors the chance to bet on
the performance of a single movie. The studio, which operates
out of a plain five-story building, doesn’t have amusement parks
and cable networks to keep it going. It rises and falls with the
release of every movie or TV show.

Hostile Takeover

“All the major studios are subsumed within multinational
media conglomerates, so even the phenomenal results of a Harry
Potter are unlikely to move the stock of Time Warner,” says
David Molner, the founder of Screen Capital International Ltd.,
a Beverly Hills, California-based firm that financed Oliver
Stone’s “W.” “Lions Gate doesn’t have a lot of places to hide
its results.”

The studio, best known for producing the Emmy Award-winning
series “Mad Men,” needs a hit. It has lost money for four
straight years, and in 2010 it fought off a hostile takeover bid
by Carl Icahn, the billionaire hedge-fund-manager.

With Hollywood’s fortunes driven by moviegoers ages 12 to
24, Feltheimer and Burns are counting on “The Hunger Games” to
become a juggernaut like the Twilight series. The teen vampire
movies have generated more than $2.3 billion in global box
office and DVD revenue, according to The Numbers, a film
industry website.

Game Changer

“We would be disappointed if we didn’t make three or four
movies,” Feltheimer says.

So would investors, who have seen Lions Gate’s stock drop
45 percent in its four fiscal years ended on March 31. “The
Hunger Games” and three potential follow-ups could generate from
$220 million to as much as $733 million in earnings before
interest, taxes, depreciation and amortization during the next
several years, according to forecasts by James Marsh, an equity
analyst at Piper Jaffray & Co. in New York, who rated the stock
a “buy” as of mid-October.

The high-end forecast would amount to three-quarters of the
studio’s market capitalization of $975 million as of Oct.10.
“The Hunger Games could be the biggest catalyst for Lions Gate’s
profits and share price during the next decade,” Marsh says. “It
could be a game changer for them.”

Financial Chess Move

A smash would rebut Icahn’s accusations that Feltheimer and
Burns were profligate managers who wasted capital on big-ticket
movies and harmful acquisitions. After Icahn amassed more than
37 percent of Lions Gate’s stock, he sought last year to replace
the board and jettison the two studio heads.

Feltheimer, who helped launch the beloved sitcom “Mad About
You” as the head of Sony Corp.’s worldwide TV production
business in the 1990s, assured stockholders that the studio’s
deals and ambitious slate of movies and TV shows would pay off.
And Burns, a one-time head of Prudential Securities Inc.’s Los
Angeles media investment banking unit, executed a financial
chess move that diluted Icahn’s voting power.

Icahn lost his proxy contest in December 2010 and failed to
place even one director on Lions Gate’s 12-member board. Nine
months later, in August, Icahn agreed to sell all of his Lions
Gate stock for $7 a share, 10 cents more than his average cost
basis of $6.90, yielding a paper profit of about $4 million.

‘Unmitigated Disaster’

Lions Gate has bet big on so-called tent pole movies before
and come up empty, says David Miller, a Los Angeles-based equity
analyst at Caris & Co. In August, the studio released “Conan the
Barbarian,” a $90 million, 3-D reboot of the swords and sorcery
epic that launched Arnold Schwarzenegger’s career in the 1980s.
The studio’s hopes that Conan would spawn sequels died after it
brought in a meager $21 million in the U.S.

While Lions Gate shared the pain with financial partners,
its next two releases -- “Warrior,” a gritty father-and-son
drama set in the world of mixed martial arts fighting, and
“Abduction,” a $35 million action movie starring 19-year-old
heartthrob Taylor Lautner -- were also disappointments at the
box office. Miller says Lions Gate’s cold streak puts more
pressure on “The Hunger Games” to deliver.

“Conan was an unmitigated disaster,” says Miller, who rated
Lions Gate shares a “sell” as of mid-October. “If you follow
this company closely, you’ll see it’s always the next movie that
becomes the reason to buy the stock. If Hunger Games doesn’t
work, the stock is going to take a big hit.”

Scores of Facebook Pages

Feltheimer and Burns have reason to be optimistic. The
movie is based on the first volume of a trilogy with 12 million
copies in print in the U.S. and editions in 44 foreign markets,
according to Scholastic Inc., the book’s New York-based
publisher.

Author Suzanne Collins’s teen protagonist, Katniss
Everdeen, who dispatches her enemies with cunning and violence
even as she experiences her first romance, has inspired scores
of fan websites, blogs and Facebook pages. The Marlborough
School, a private academy for girls in grades 7 through 12 in
Los Angeles, is one of many that have added the books to their
reading lists.

Burns, a lanky man with a boyish face that belies his taste
for corporate combat, says the movie offers Lions Gate that most
coveted Hollywood prize: a reservoir of revenue that can be
tapped for years. “Everyone is looking for stability in this
business, so if the first one works, then you should have three
more that work, and you create predictability in a very
unpredictable business,” Burns says in his rat-a-tat style.

‘Too Much Heat’

Feltheimer, whose chiseled jaw and deep-set eyes could get
him cast in a Western, nods in agreement. He says “The Hunger
Games” must hit $100 million in domestic box office sales to
justify making sequels. “I’m not too concerned we won’t get to
that kind of number,” the studio head says.

He points to an issue of “Entertainment Weekly” magazine on
a coffee table. It features two of the film’s hunky young stars,
Josh Hutcherson and Liam Hemsworth, on the cover. “There’s just
too much heat for this property around the world,” he says.

Burns squirms at his partner’s confidence. “Can I just
knock on wood through this entire interview?” he says, rapping
the side of his chair.

Founded in 1997 in Vancouver by a movie-loving Canadian
mining financier named Frank Giustra, Lions Gate made its name
producing and distributing edgy R-rated fare such as “American
Psycho,” the 2000 sleeper starring Christian Bale as a Wall
Street serial killer. The studio, which went public in 1997,
consistently lost money.

Martini-Soaked World

When Feltheimer and Burns took charge in March 2000, they
set out to make it profitable by acquiring other small studios
and film libraries and selling DVDs and telecast rights to cable
and broadcast channels. “The core of our original strategy was
to build a library,” Burns says. “We liked the annuity aspect of
the income. It’s the gift that keeps on giving.”

By 2006, the duo also snared their first Academy Award. The
urban drama “Crash” won for best picture. The Oscar sits
gleaming on a credenza in Feltheimer’s office.

Feltheimer had tapped a wiry young production executive
named Kevin Beggs to lead a push for original TV programming in
the then-unexplored wilderness of basic cable. In 2006, a script
brimming with workplace sex penned by Matthew Weiner, a writer
on HBO’s mobster series “The Sopranos,” landed on Beggs’s desk.
It was called “Mad Men,” and Beggs and Feltheimer fell in love
with its depiction of the martini-soaked world of Madison Avenue
in the early 1960s.

Sixfold Jump

Still, concerned that the show wouldn’t sell overseas,
Beggs passed on making the pilot. So did HBO. Undeterred,
American Movie Classics, a cable haven for old Westerns, went
ahead and made the pilot and sent it to studios. Beggs and
Feltheimer were won over by the show’s risque themes and hastily
consummated a production deal.

“It had its risks, but we saw the quality,” says Beggs, 45,
a Californian who started his production career on the bikini
and beefcake series “Baywatch.” “Mad Men” would go on to become
the studio’s No. 1 TV program, generating $200 million in
streaming rights and DVD sales for its first four seasons.

At the close of fiscal 2007, the studio raked in $257
million in sales from licensing the 11,800 movies and TV
episodes in its library compared with almost $40 million on the
1,500 titles it controlled in 2001.

The studio’s two most valuable franchises -- the Saw series
of horror films and Tyler Perry’s comic Madea movies chronicling
African-American life -- helped it record a third consecutive
year of profitability. Lions Gate’s shares jumped sixfold from
March 31, 2003, to March 31, 2007, or to $11.42 a share from
$1.91.

$255 Million Deal

“I initially thought of Lions Gate as a library rollup
play, but surprise, surprise, they ended up being creative
content guys,” says Gordon Crawford, a portfolio manager at
Capital Research & Management Co. in Los Angeles, which holds a
9 percent stake in Lions Gate.

By 2008, Icahn had started accumulating shares in Lions
Gate as Feltheimer and Burns expanded beyond their original
content strategy and into cable TV. That April, they committed
to invest up to $43 million in a subscription cable channel
called Epix as part of a three-way joint venture with Metro-Goldwyn-Mayer Inc. and Viacom Inc.’s Paramount Pictures. And in
March 2009, Lions Gate paid $255 million in cash to buy the TV
Guide Network and TVGuide.com from Macrovision Solutions Corp.,
a Santa Clara, California-based software maker.

‘Profligate Spending’

Feltheimer and Burns made the deals to deliver their movies
and TV programs through alternative channels as DVD sales
started falling industrywide. The studio tapped a $340 million
credit line to pay for the TV Guide Network and website, and its
debt in fiscal 2009 jumped 69 percent to $557 million from the
prior year.

It was bad timing, as the credit crunch drove the economy
into a recession. In fiscal 2009, Lions Gate lost $178 million
on $1.5 billion in sales after a flurry of flops such as “The
Spirit,” a movie about a ghostly superhero. Lions Gate’s stock
sank to a five-year low of $3.90 on Feb. 10, 2009. Icahn saw his
opening and pounced.

In letters to Lions Gate’s board and shareholders during
the next year, he criticized management for wasting more than
$235 million on money-losing assets such as Epix, TV Guide and
FearNet, a cable channel devoted to horror movies. Icahn issued
a series of tender offers to buy up big chunks of Lions Gate
stock. In April 2010, he indicated he would try to unseat
Feltheimer and Burns from both the board and the executive suite
and install his own allies as directors and senior management.

10-day Truce

“I think profligate spending has taken its toll on Lions
Gate’s share price,” Icahn wrote to Feltheimer in a letter on
April 15, 2010. He declined to comment for this article.

Feltheimer and Burns countered that Icahn wanted to
withdraw from production and focus solely on distributing films
to theaters, an approach that would unravel the studio they’d
been building for a decade. “Under Mr. Icahn’s proposed
direction, Lions Gate would give up its movie business and its
highly profitable TV business, both of which replenish Lions
Gate’s library,” they wrote in a letter to shareholders on that
April 21.

On July 9, 2010, the two sides agreed to a 10-day truce to
jointly explore whether a Lions Gate merger with struggling MGM
might benefit shareholders. No deal emerged; yet, Burns used the
lull to engineer a critical debt-for-equity swap, according to
court records filed in subsequent litigation.

Icahn Diluted

Shortly after the cease-fire expired at midnight on July
20, the studio’s board approved a transaction in which Lions
Gate exchanged about $100 million in convertible debt held by
Kornitzer Capital Management Inc., a Shawnee Mission, Kansas-based investment firm, into new notes. Kornitzer sold the notes
to MHR Advisers LLC, a New York hedge fund controlled by Mark
Rachesky, a one-time protege of Icahn’s who had thrown his
support to Lions Gate management.

Rachesky converted the notes into more than 16 million new
equity shares at $6.20 each, well below Icahn’s latest tender
offering of $7. As a result, Icahn’s 37.2 percent stake in Lions
Gate was diluted to 32.8 percent, while Rachesky’s position
swelled to 28.8 percent from 19.2 percent. Along with the
support of other allies, Feltheimer and Burns could count on 43
percent of Lions Gate’s voting shares.

Icahn decried the move as a breach of his standstill
agreement with Lions Gate to refrain from such action during the
10-day truce. He sued in New York and Vancouver, where Lions
Gate is incorporated, to block Rachesky from voting his shares.
Lions Gate said the swap was simply designed to retire debt.

Hot Property

After Icahn lost rulings in both courts, the studio’s
shareholders in December 2010 re-elected Feltheimer with 96
percent of the vote. And in September 2011, Rachesky, who has
been a Lions Gate director since 2009, was named co-chairman.

As the takeover fight raged, Alli Shearmur, Lions Gate’s
president of movie production, had zeroed in on a hot property
making the rounds in Hollywood: “The Hunger Games” (Scholastic
Press, 2008). She gave copies to Feltheimer; Burns; her boss,
Joe Drake, president of Lions Gate’s motion picture group; and
other studio executives. They were immediately smitten by the
story of how the resourceful Katniss Everdeen fights for her
survival in the lethal games of the title. News Corp.’s
Twentieth Century Fox and other major studios were also circling
the book.

When Drake and Shearmur pitched author Collins and
independent producer Nina Jacobson for the rights in late 2008,
they vowed to make a character-driven story that would resonate
with young readers.

Priciest Picture Ever

“We weren’t going to let the violence be gratuitous or the
selling point of the franchise,” says Shearmur, who oversaw the
Bourne series starring Matt Damon while she was an executive at
Universal Pictures Ltd. in 2002. “This is an emotional story
about a young girl who sacrifices everything and sets off a
revolution she never intended.”

Drake also pledged that, unlike major studios, which often
shelve projects, Lions Gate would make the picture. “We
certainly sold the legacy of scripts and great books never
seeing the light of day,” Drake says.

In greenlighting Lions Gate’s priciest picture ever,
Feltheimer hedged the financial risk by selling the
international distribution rights, except for the U.K., to other
studios. Piper Jaffray’s Marsh estimates that Lions Gate
collected $50 million in upfront cash from the deals in exchange
for permitting its partners to pocket box office sales in
foreign markets.

Patience Running Out

After receiving tax incentives from North Carolina, where
the film was shot this summer, Lions Gate has about $30 million
at risk in the production, Feltheimer says. The studio will
probably spend another $40 million in marketing and advertising
“The Hunger Games,” he says.

For 11 years, Feltheimer and Burns have labored to turn
Lions Gate into a Hollywood player that does it all, from
producing and distributing movies and TV shows to running cable
networks. Epix is now profitable after its controlling partners
negotiated a $1 billion deal to stream its movies on Netflix
Inc.’s website. This month, “Margin Call,” a low-budget Wall
Street drama starring Kevin Spacey distributed by Lions Gate and
partner Roadside Attractions, is winning much needed critical
acclaim and word-of-mouth praise from moviegoers.

Shares Rally

And anchored by “Mad Men” and “Weeds,” a series about a
marijuana-dealing soccer mom, the studio’s TV revenue has
tripled in the past four years, to $353 million in fiscal 2011.
Since it opened its current fiscal year on April 1, Lions Gate’s
stock has rallied 37 percent, closing at $8.64 on Nov. 7.

Yet Feltheimer and Burns are struggling with big-ticket
movies, which made up three-quarters of the studio’s $1.6
billion in sales last year. After several box-office bombs from
Lions Gate, its shareholders are now counting on it to deliver a
blockbuster. “Patience is running out,” Caris’s Miller says.
Feltheimer and Burns find their studio’s fortunes riding on the
shoulders of a 16-year-old girl fighting for her life.